October 19, 2005
Scaling Community Investment: Report Addresses Growth in Community Development Finance
by William Baue

An Aspen Institute report serves as the basis of a series of conferences at regional federal
reserve banks on how to best scale up community investment.

The Federal Reserve Bank of Boston is hosting
a conference on
the intersection of socially responsible investing (SRI) and community investment (CI) entitled
Achieving Sustainability, Scale, and Impact in Community Development Finance on November
3-4, 2005. The impetus for the conference, the second in a series of seven to be held at federal
reserve banks nationwide over the next two years, is a December 2004
report issued by the Aspen
Institute Economic Opportunities Program (EOP).

The report, entitled New Pathways to Scale for Community
Development Finance, identifies scaling up strategies as well as risks for community
development financial institutions (CDFIs) through ten
case studies of organizations that expanded operations. The case studies include organizations
in the CI field such as ACCIÓN, Self-Help, and the Reinvestment Fund, as well as more mainstream for-profit models,
such as 7-Eleven (ticker: SE), Dell (DELL), and VISA. The focus is not on replicating exact tactics, but
rather on applying lessons to the idiosyncrasies of CI.

"Private sector actors tend to
talk about 'scale' as in 'economies of'--i.e., presuming a cost model in which variable costs
decline as production increases," state report lead authors Kristin Moy, EOP's director, and Greg
Ratliff, an Aspen Institute senior fellow. "However, for the CDFI industry, reaching scale
typically refers to delivering product(s) to a large audience, delivering more products, or
increasing assets or loan volumes."

"Ultimately, the notion of scale for CDFIs must
include expanded volume, reach, increased efficiency resulting in sustainability, and deepened
social impact," they continue.

The report notes that the current CDFI system is inadequate
for reaching the scale necessary to positively impact the majority of low-income communities
nationwide, as it does not include three critical components: standardization, infrastructure, and
deliberate roll-out.

"The CDFI industry has many best practices but far fewer generally
accepted standards, protocols, methodologies, or technology applications that allow for large-scale
and deliberate roll-out," the report states.

As the researchers looked more in-depth, they
realized they needed to study scaling up for CDFIs on the product, organization, and industry
levels. Examining the industry level yielded the most significant findings. The researchers
proposed three industry structure models. The first describes traditional corporate-customer
relations. The second encapsulates smaller industry players and intermediaries interacting with
customers. The third corresponds closest to CI, where the relationships with funders and
regulators may currently player a more significant role than those with customers.

"The
most remarkable hypothesis to come out of this industry model is that there is a disconnect between
members of the CDFI industry and customers when subsidy becomes an important component of
successful product delivery," the report states. "Rather than having a direct relationship as in
the other two structures, it appears that the role of subsidy disrupts the customer interface
focusing attention on investors/funders and the regulatory process."

"Because the target
market consists of a mostly low-income population that cannot fully afford the goods and services
provided, the CDFI is forced to look elsewhere to cover its operating expenses and support
continued delivery of its products," it continues.

The researchers extrapolate 11 lessons
from the three models (product-level, organization-level, and industry-level) for achieving scale.
For example, they recommend significant investment in infrastructure and technologies as well as
entering into strategic partnerships with aligned organizations.

The report ends with five
conclusions, including the fact that "growth is perilous" and the exhortation to remember the
mission of community investment, which is to positively impact low-income communities.

"The relationship between scale and impact is still not clearly understood," the report authors
write. "On the one hand, scale may be only one way to reach impact."

"On the other hand,
by concentrating primarily on scale and how to achieve it, we run the risk of losing the focus on
increasing impact on underserved people and communities," they conclude.

The report is
intended to serve as a point of departure for the conferences, which will consider ways the SRI and
CI communities can interface in mutually beneficial ways. Leaders of these fields will speak at
the Boston conference to represent their communities. SRI leaders include Domini Social Investments founding CEO Amy Domini, Social
Investment Forum (SIF) President and SRI
Director for Walden Asset Management
Tim Smith, and Calvert CI Industry and
Markets Director Elizabeth Glenshaw. CI leaders include New Hampshire Community Loan Fund (NHCLF) President Juliana Eades, Community
Reinvestment Fund (CRF) President and CEO
Frank Altman, and Coastal Enterprises, Inc. (CEI) President Ron Phillips.